Insights and Publications

Michigan Governor Snyder has made improving and modernizing Michigan’s infrastructure a focus of his administration. Appropriations for infrastructure-related projects were a top priority in the Governor’s FY 2016-2017 budget recommendations unveiled yesterday. In addition to a $54.9B budget recommendation for the coming state fiscal year, the Governor also issued a supplemental budget request for FY 2015-2016, which includes $25M for water-related infrastructure projects in Flint and a $165M investment in the to-be-created Michigan Infrastructure Fund. This fund will be used to replace high-risk lead and copper lines in communities throughout the State. The fund, which must be created by legislation, will also be used to implement the recommendations of the Commission for Building the 21st Century Infrastructure, the formation of which the Governor announced in his 2016 State of the State Address, and whose report on the state of Michigan’s infrastructure is due in September 2016.

The report begins with an overview of the alliance, examining the various components of the extended deterrent, including nuclear, conventional and political deterrence. Next, it examines the evolving security environment in Northeast Asia and suggests that advanced conventional weapons could have an increased role in responding to the altered environment. The report then analyzes the costs and benefits of the potential contribution of Japanese conventional weapons systems to the U.S.-Japan alliance.

Disaster Risk Reduction (DRR) is a vital defense against climate change and displacement, particularly in the current context of increasing numbers of disaster-affected persons. In the last two decades, for example, an estimated 200 million people have been affected every year by natural disasters. A significant portion of the disaster-affected community is also disaster-displaced, making them even more vulnerable to human rights violations. The Operational Guidelines on Human Rights and Natural Disasters, developed by the RSG for Human Rights of Internally Displaced Persons (IDPs), provides recommendations to humanitarian organizations on how to ensure that the human rights of those affected by natural disasters are upheld. Yet it is equally important to examine how the risk of natural disasters can be reduced and we need to think about practical steps which can be taken to mitigate the effects of disasters.

France’s strategic defense review, published in April, was met with sighs of relief in several European capitals and in Washington. Many had feared that Paris would replicate the debilitating defense cuts introduced by a number of European countries since the onset of the economic crisis. According to some EU officials, European defense budgets combined have dropped from €200 to €170 billion since 2008, as governments have sought to rein in public spending. But President François Hollande resisted calls from his finance ministry to reduce the defense budget by 10 per cent. Instead he has frozen funds for France’s armed forces at just over €30 billion a year until 2019.

The rapid expansion of the Washington area in recent years, particularly in the outer suburbs, has spawned fears that uncontrolled growth endangers the environment, aggravates transportation problems, and makes inefficient use of existing infrastructure. One alternative to suburban growth is to have a larger share of the area's residential expansion in the District of Columbia. Moreover, such an alternative is consistent with Mayor Williams' and other District officials' optimistic projections for an increased city population in coming years. To make this happen, however, new housing construction or rehabilitation of vacant housing in the District will have to increase by a substantial number of units.

The high profile of infrastructure and access to related services in the communiques of the World Bank and the International Monetary Fund (IMF) at their annual meetings in late 2014 underscores the importance of this issue for development worldwide. Nowhere is lack of infrastructure more crucial and potentially transformational than in sub-Saharan Africa. In 2009, the World Bank and major donors and multilateral institutions investigated this challenge of addressing the region’s glaring infrastructure gap. That comprehensive regional analysis aimed to establish “a baseline against which future improvements in infrastructure services can be measured” and guide priority investments and policy reforms. The analysis estimated that the region needed $93 billion per year to fill the infrastructure gap.

State and local bond finance represents a powerful but underutilized tool for future clean energy investment. For 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large amounts for important purposes by selling bonds to Wall Street. The challenge is therefore to create new models for clean energy bond finance in states and regions, and so to establish a new clean energy asset class that can easily be traded in capital markets.

Oxford University opened its brand new China Centre recently amid much fanfare and the presence of royalty. Dickson Poon, from Hong Kong, provided key funding and was present to cut the ribbon. The building is very impressive, a far cry from the run-down engineering facilities I recall as a student. As the building is located on the grounds of one of the colleges, St Hughs, it will readily integrate into student life.

Most importantly, the facility will bring together professors and researchers studying China from across the spectrum of programs in the university – medicine, history, politics, economics, business and more – to allow cross-disciplinary initiatives to develop. Moreover, the Centre should become a focal point for the 900 Chinese students at Oxford and the many hundreds of non-Chinese who are interested in China. Outside of term time, the combination of meeting rooms, social areas and residential accommodation will make the Centre a sought after destination for corporate events.

China is entering a new phase of economic development, with a focus on achieving more sustainable growth. Faster adoption of electric vehicles (EVs) is widely seen as an effective way to reduce China’s growing dependence on imported oil, relieve pollution in congested urban areas, and help domestic OEMs and suppliers to gain a competitive edge over their stronger international rivals.

Yet, despite having invested more than RMB 37 billion in various forms of subsidies to OEMs, suppliers, consumers and researchers, China lags behind other leading markets in the development of its EV industry ecosystem. China has also missed its own targets for EV sales, infrastructure roll-out, and technology.

This paper looks at the current EV ecosystem in China, and highlights potential lessons that can be drawn from successful experience in other countries. It then seeks to frame a set of questions and options to inform discussions about the policy framework required to enable the development of electric vehicles in China. This paper does not make or imply recommendations for action by government or industry players.

Returning to one of my long term themes in China – the development of domestic soccer.

Earlier this month, soccer returned to the priority list of China’s leaders. Xi Jinping, Li Keqiang and friends held a meeting to discuss how to improve the still dismal state of Chinese soccer. Success in soccer is linked to the realization of the Chinese dream. Presumably, this means that lots of money will be thrown at the problem.

It will be great to have more qualified coaches, more pitches and more grass roots participation, but will it achieve the desired outcomes? Not without broader changes and, as with so many initiatives to improve an industry in China, greater foreign participation.

We need to view soccer as an industry, an industry trying to attract discretionary spending from Chinese consumers directly through tickets and merchandise, and indirectly by viewing TV channels that pay market rates to air games and buying products/services from sponsors of the teams.

We are a long way from having all the enablers necessary to justify this. Just contrast what people will pay to watch a movie in China to what they will pay to watch a soccer match. A Chinese movie fan will readily pay US$20 to watch the latest movie on an IMAX screen; but season tickets for a Chinese soccer team can still cost less than US$100.

A friend recently gave me a bottle of red wine from the first harvest of his new vineyard in Shandong province – output so new that the bottle does not even have a label. I admit I have not drunk it yet, so sorry ratings not available on its quality.

When I saw some news reports this week that China had become the world’s second largest wine producer I was concerned my friend might be caught in the classic China overinvestment trap. That’s when an idea catches hold and entrepreneurs run to invest until many times potential demand is quickly supplied. Probably true here.

But I was also a little surprised with the headline and so I looked at the source material from the OIV (International Wine Organization). I found a rather different and more interesting story. (Some of the misunderstanding may have arisen because their slides are in French).

In December 2013, five U.S. financial regulatory agencies adopted final regulations to implement the Volcker Rule. As expressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule generally prohibits banking entities from engaging in proprietary trading, but permits certain types of proprietary trading activities — including underwriting, market making and risk-mitigating hedging. The Volcker Rule also prohibits banking entities from making substantial investments in, and conducting certain other activities with respect to, private equity funds and hedge funds. The Volcker Rule represents an effort to separate the “social safety net” afforded by the Federal Reserve’s discount window (which provides short-term, low-interest loans to banking institutions to cover shortages of liquidity) from risks incurred by financial institutions through their own short-term investments.

On October 11 and 12, 2011, the Office of the Comptroller of the Currency, Department of the Treasury (OCC); the Board of Governors of the Federal Reserve System (Federal Reserve); the Federal Deposit Insurance Corporation (FDIC); and the Securities and Exchange Commission (SEC) jointly released a notice of proposed rulemaking (the Notice) pursuant to the authority granted to those agencies by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “Volcker Rule.” In the Notice, the agencies released the text of the regulations proposed pursuant to the Volcker Rule and an introduction containing supplemental information.

The introduction includes a summary of the proposed regulations and provides commentary and guidance on the proposed regulations. The introduction also includes questions and requests for public comment on more than 350 topics, covering virtually every aspect of the proposed regulations. Public comments on the proposed regulations are due on or before January 13, 2012.

The Nasdaq listing requirement will require companies to have a compensation committee of at least two independent directors. Although Nasdaq currently provides an alternative where compensation matters could be handled by the independent directors as a group, most Nasdaq-listed companies already have a compensation committee with at least two independent directors.

Pursuant to the Nasdaq rules, the compensation committee must have a formal written charter. The charter would have to reflect the committee’s responsibilities, including structure, processes and membership requirements, as well as the committee’s responsibility for determining (or recommending to the board of directors for determination) the compensation of the company’s chief executive officer and all other executive officers of the company. The charter also would need to specify that the company’s chief executive officer may not be present during voting or deliberations on his or her compensation. And finally, the committee charter must specify the specific committee responsibilities and authorities to retain compensation consultants, legal counsel and offer advisers, at company expense, and to consider adviser conflicts. The committee is required to review and reassess the adequacy of the charter on an annual basis.

Pursuant to the NYSE rules, the compensation committee charter must be amended to reflect the rights and responsibilities of the compensation committee under the Dodd-Frank compensation committee rules. Although most NYSE-listed company charters already reflect the committee authority to retain consultants, counsel and advisers, most charters will need to be amended with respect to committee consideration of adviser conflicts.

Foreign exchanges that allow direct access to their markets by U.S. market participants have been operating for many years under no-action letter relief granted by the staff of the U.S. Commodity Futures Trading Commission (CFTC or Commission). In Section 738 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Congress amended Section 4(b) of the Commodity Exchange Act (CEA) to authorize the CFTC to adopt rules requiring registration of foreign markets in lieu of the no-action process.

On December 5, the CFTC exercised this authority and unanimously voted to adopt final rules imposing formal registration and other requirements on foreign exchanges, known as foreign boards of trade (FBOTs) that allow persons in the United States to directly access the FBOT’s electronic trading and order matching systems for futures, options on futures and CFTC-regulated swaps. See 76 Fed. Reg. 80674 (Dec. 22, 2011). These rules will replace the CFTC’s informal no-action process for FBOTs and will require FBOTs operating under these no-action letters to apply for registration. The final rules will become effective February 21, 2012.

Disputes are often far from the minds of the parties at the time of entering into an agreement. Everyone is excited about the new opportunities brought by the new agreement and the new relationship and are quick to dismiss the possibility of any disputes arising. A few months or years into the project and the story may be very different. In the unfortunate event that a dispute arises, how is it to be resolved? What have the parties agreed in the dispute resolution clause and is the clause effective and enforceable? Recent cases in Australia and England have highlighted potential issues that may arise from poorly drafted dispute resolution clauses. This alert briefly considers the potential risks and drafting questions to consider as well as tips for drafting effective dispute resolution clauses.

The U.S. Securities and Exchange Commission (SEC) announced on May 17 that it has entered into its first-ever deferred prosecution agreement (DPA). The SEC entered into the agreement with Tenaris S.A., a Luxembourg steel pipe supplier, in connection with allegations that Tenaris violated the Foreign Corrupt Practices Act (FCPA) by bribing Uzbekistan government officials.

According to the statement of facts in the DPA, Tenaris allegedly retained the services of a third-party agent to help it bid on pipeline contracts with OAO, a subsidiary of an Uzbekistan state-owned holding company. The third-party agent reportedly obtained confidential information about competitors’ bids from OAO officials, supplied it to Tenaris and arranged for Tenaris to submit revised bids. Tenaris’ sales personnel allegedly understood that the commissions paid to the agent were used, in part, to pay OAO officials for the confidential bid information and the ability to submit revised bids. Tenaris is claimed to have made over $4.7 million in profits in 2006 and 2007 from the pipeline contracts it was awarded by the subsidiary.

Under the DPA, the SEC agreed not to bring an enforcement action against Tenaris arising from its investigation in exchange for Tenaris’ agreement to, among other things, pay approximately $5.4 million in disgorgement and prejudgment interest, and to perform certain undertakings. In a related criminal investigation, Tenaris entered into a non-prosecution agreement with the U.S. Department of Justice and agreed to pay a $3.5 million penalty.

The Commodity Futures Trading Commission (CFTC) recently proposed rules to address the cross-border application of margin requirements for uncleared swaps for swap dealers and major swap participants not subject to regulation by U.S. banking regulators (collectively “covered swap entities” or CSEs).

In 2014, U.S. banking regulators (Prudential Regulators) and the CFTC each re-proposed rules that would impose margin requirements for uncleared swaps. In the cross-border context, the Prudential Regulators’ proposal would allow swap entities operating in a foreign jurisdiction or organized as foreign branches of U.S. banks to rely on substituted compliance with a foreign regulatory framework for uncleared swaps margin if the Prudential Regulators jointly determine that such foreign margin requirements are comparable to the requirements of the Prudential Regulators’ uncleared margin rules.

As to the CFTC, prior to issuing its uncleared margin re-proposal, the CFTC issued cross-border interpretive guidance that addressed many transaction and entity-level requirements but was silent on uncleared margin. The CFTC took a more circumspect approach in its 2014 re-proposal by including an Advance Notice of Proposed Rulemaking (ANPR) requesting comment on three alternative approaches to applying uncleared margin requirements to cross-border transactions. The CFTC is now proposing a hybrid approach to its three proposed alternatives that would allow substituted compliance for a CSE depending on whether the CSE is a U.S. person or a non-U.S. person as defined in the CFTC’s proposed rules.

For U.S. CSEs (including non-U.S. CSEs whose swap obligations are guaranteed by a U.S. person), the CFTC would permit substituted compliance for posting uncleared initial margin to (but not collecting uncleared margin from) any non-U.S. counterparty whose uncleared swap obligations are not guaranteed by a U.S. person, provided that the CFTC determines that the non-U.S. CSE is subject to comparable margin requirements in its home jurisdiction. The proposed rules provide a standard of review for any CFTC comparability determination, which the CFTC describes as an “outcome-based” approach that evaluates the comparability of end results on an element-by-element basis. For example, the CFTC could determine that a jurisdiction’s initial margin calculation requirements are comparable, but the jurisdiction’s collateral standards are not, and thus only allow substituted compliance for the former but not the latter.

For non-U.S. CSEs whose swap obligations are not guaranteed by a U.S. person, substituted compliance as described above generally would be available as well for swaps with certain other entities including U.S. persons who are not CSEs. In addition, the CFTC has proposed an outright exclusion from its uncleared margin requirements for any uncleared swap entered into between a non-U.S. CSE and any other non-U.S. person (including another non-U.S. CSE), provided that (i) neither counterparty’s swap obligations are guaranteed by a U.S. person, and (ii) neither counterparty is a “Foreign Consolidated Subsidiary” nor a U.S. branch of a non-U.S. CSE. If adopted, the CFTC’s cross-border approach for uncleared margin would be more consistent with the approach proposed by the Prudential Regulators in 2014, but still could create a number of regulatory disconnects both inside and outside of the CFTC’s regulatory regime. For example, the CFTC’s proposed definition of U.S. person differs both from the U.S. person definition in the CFTC cross-border guidance and the U.S. person definition adopted by the Securities and Exchange Commission in August 2014. Similarly, the CFTC proposal contains a definition of “guarantee” that may raise interpretive differences when compared with the general description of the term relied upon for purposes of the CFTC cross-border guidance. Lastly, the proposed definition of a “Foreign Consolidated Subsidiary” is based on a “consolidation test” rather than the “control test” used in the Prudential Regulators’ proposal.

The CFTC has asked for comment on these and a variety of other issues. The comment period for the CFTC proposal will close 60 days after the proposal is published in the Federal Register.

The rush of commentary on the proxy access rules adopted by the Securities and Exchange Commission on August 25, 2010, which provide certain shareholders with the right to require that companies include shareholder-nominated director candidates in company proxy materials, dissipated quickly when the Commission stayed the effective date of the rules. Although it is not surprising that the attention of companies and their advisers has been diverted to other matters, including more recent or imminent SEC rule proposals, a number of key implementation issues will need to be addressed if the proxy access rules take effect. The Commission's order granting the stay (pending judicial review) — which will delay the impact of the new proxy access rules until at least the 2012 proxy season for many companies — provides an opportunity to consider these issues in a thoughtful and deliberate manner.

Successive investigations in France following U.S. prosecutions and settlements have led to court challenges on the grounds of double jeopardy, a trend that will only increase as more countries scrutinize the same conduct in multijurisdictional investigations. Under Article 113-9 of the French Criminal Code (and Article 692 of the Code of Criminal Procedure), a French citizen cannot be prosecuted for crimes and misdemeanors (délits) committed outside France, nor can a foreigner if the offense involved a French victim, if the perpetrator has been tried abroad for the same facts and, if convicted, a sentence was served or is time-barred.

However, for offenses committed at least in part on French republic territory, French courts consistently have held that decisions rendered by foreign tribunals in connection with the same facts do not have res judicata effect in France. In 2013, the French Supreme Court (Cour de cassation) slightly tempered that principle by holding that any period of imprisonment spent abroad should be taken into consideration by the French criminal court at the sentencing stage.

In recent years, the broad interpretation of the scope of certain laws and regulations, especially in corruption, economic sanctions and money laundering cases, has increased the number of cases in which an individual or legal entity is prosecuted and possibly sanctioned twice for the same set of facts — especially in situations in which U.S. authorities have secured an NPA, DPA or guilty plea. This has led the Paris criminal court of first instance (Tribunal correctionnel) to revisit the above jurisprudence and decide that the ne bis in idem principle should in fact be enforced by French courts.